Table of Contents
USAA Family of Funds 1
Message from the President 2
Investment Review:
USAA California Bond Fund 4
USAA California Money Market Fund 11
Shareholder Voting Results 14
Financial Information:
Portfolios of Investments:
Categories and Definitions 15
USAA California Bond Fund 17
USAA California Money Market Fund 21
Notes to Portfolios of Investments 25
Statements of Assets and Liabilities 26
Statements of Operations 27
Statements of Changes in Net Assets 28
Notes to Financial Statements 29
Important Information
Through our ongoing efforts to reduce expenses and respond to shareholder
requests, your annual and semiannual report mailings are "streamlined." One copy
of each report is sent to each address, rather than to every registered owner.
For many shareholders and their families, this eliminates duplicate copies,
saving paper and postage costs to the Fund.
If you are the primary shareholder on at least one account, prefer not to
participate in streamlining, and would like to continue receiving one report per
registered account owner, you may request this in writing to:
USAA Investment Management Company
Attn: Report Mail
9800 Fredericksburg Road
San Antonio, TX 78284-8916
or phone a Mutual Fund Representative at 1-800-531-8448 during business hours.
This report is for the information of the shareholders and others who have
received a copy of the currently effective prospectus of the USAA California
Funds, managed by USAA Investment Management Company (IMCO). It may be used as
sales literature only when preceded or accompanied by a current prospectus which
gives further details about the Fund.
USAA with the eagle is registered in the U.S. Patent & Trademark Office.
(Copyright)1999, USAA. All rights reserved.
USAA Family of Funds Summary
Fund Minimum
Type/Name Volatility Investment
--------- ---------- ----------
CAPITAL APPRECIATION
===============================================================================
Aggressive Growth Very high $3,000
Emerging Markets Very high $3,000
First Start Growth Moderate to high $3,000
Gold Very high $3,000
Growth Moderate to high $3,000
Growth & Income Moderate $3,000
International Moderate to high $3,000
S&P 500 (Registered Trademark)
Index Moderate $3,000
Science & Technology Very high $3,000
Small Cap Stock Very high $3,000
World Growth Moderate to high $3,000
ASSET ALLOCATION
===============================================================================
Balanced Strategy Moderate $3,000
Cornerstone Strategy Moderate $3,000
Growth and Tax
Strategy Moderate $3,000
Growth Strategy Moderate to high $3,000
Income Strategy Low to moderate $3,000
INCOME - TAXABLE
===============================================================================
GNMA Low to moderate $3,000
High-Yield
Opportunities High $3,000
Income Moderate $3,000
Income Stock Moderate $3,000
Intermediate-Term
Bond Low to moderate $3,000
Short-Term Bond Low $3,000
INCOME - TAX EXEMPT
===============================================================================
Long-Term Moderate $3,000
Intermediate-Term Low to moderate $3,000
Short-Term Low $3,000
State Bond Income Moderate $3,000
MONEY MARKET
===============================================================================
Money Market Very low $3,000
Tax Exempt
Money Market Very low $3,000
Treasury Money
Market Trust Very low $3,000
State Money Market Very low $3,000
- -------------------------------------------------------------------------------
Foreign investing is subject to additional risks, which are discussed in the
funds' prospectuses.
S&P 500 (Registered Trademark) is a trademark of The McGraw-Hill Companies, Inc.
and has been licensed for use. The Product is not sponsored, sold or promoted by
Standard & Poor's, and Standard & Poor's makes no representation regarding the
advisability of investing in the Product.
Some income may be subject to state or local taxes or the federal alternative
minimum tax.
An investment in a money market fund is not insured or guaranteed by the FDIC
or any other government agency. Although the fund seeks to preserve the value
of your investment at $1 per share, it is possible to lose money by investing
in the fund.
The Science & Technology Fund may be more volatile than a fund that diversifies
across many industries.
The InveStart (Registered Trademark) program is available for investors without
the $3,000 initial investment required to open an IMCO mutual fund account.
A mutual fund account can be opened with no initial investment if you elect to
have monthly automatic investments of at least $50 from a bank account.
InveStart is not available on tax-exempt funds or the S&P 500 Index Fund. The
minimum initial investment for IRAs is $250, except for the $2,000 minimum
required for the S&P 500 Index Fund. IRAs are not available for tax-exempt
funds. The Growth and Tax Strategy Fund is not available as an investment for
your IRA because the majority of its income is tax exempt.
California, Florida, New York, Texas, and Virginia funds available to residents
only.
Non-deposit investment products are not insured by the FDIC, are not deposits or
other obligations of, or guaranteed by, USAA Federal Savings Bank, are subject
to investment risks, and may lose value.
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, including charges and operating expenses,
please call 1-800-531-8181 for a prospectus. Read it carefully before you
invest.
Message from the President
[PHOTOGRAPH OF PRESIDENT AND VICE CHAIRMAN OF THE BOARD: MICHAEL J.C. ROTH, CFA,
APPEARS HERE]
For as Long as I Have Managed Money
for customers, it has been obvious that few things puzzle or distress them as
much as a falling bond market. People generally view bonds as a risk-lowering
tool. They add bonds to a portfolio to reduce overall volatility and to create
an added buffer with the relatively high income. Some people use bond portfolios
as their sole investment. Their thinking is that they will live off the income
and not be concerned about market values because they intend to let the bonds
mature. These kinds of strategies were much easier to execute before the days of
fixed-income mutual funds.
Mutual funds did something for bond investors that had never been done before --
show investors every day what their portfolio was worth. In the process, the
funds revealed just how much bond prices can move in a day or a week. No
investor likes to see a portfolio lose market value, especially when the
investor is thinking in terms of "low risk." The latter part of 1998 and the
first three quarters of 1999 have been a period of generally rising interest
rates, which has meant falling market prices. Let me tell you how we approach
such times.
First, we believe interest-rate movements are nearly impossible to predict with
both accuracy and consistency. Second, we believe that most tax-exempt income
investors are primarily interested in a high and stable level of income. Since
the common way to preserve market value in a period of rising interest rates is
to switch to money market investments at much lower yields, the importance of
belief one is magnified. And third, we believe experience going back many years
indicates that the part of a portfolio that is invested in longer maturities may
provide returns that are superior to the money markets.
The chart below shows the one-, five-, and ten-year average annual total returns
for our four national tax-exempt funds. Please bear in mind that there are no
guarantees here -- just as with all mutual funds.
Average Annual Total Returns as of September 30, 1999
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
USAA Tax Exempt Long-Term Fund -3.23 6.45 6.93
- --------------------------------------------------------------------------------
USAA Tax Exempt Intermediate-Term Fund -1.24 6.23 6.88
- --------------------------------------------------------------------------------
USAA Tax Exempt Short-Term Fund 2.06 4.90 5.21
- --------------------------------------------------------------------------------
USAA Tax Exempt Money Market Fund 3.10 3.39 3.67
- --------------------------------------------------------------------------------
Total return equals income plus share price change and assumes reinvestment of
all dividends and capital gains distributions.
The performance data quoted represent past performance and are not an indication
of future results. Investment return and principal value of an investment will
fluctuate, and an investor's shares, when redeemed, may be worth more or less
than their original cost.
I think the best way to address volatility in bond markets is by allocating some
of your portfolio to the short-term part of the market. I believe that the
pattern of the average annual total returns shown in the chart above is viable.
So, the income part of my portfolio is concentrated in the USAA Tax Exempt
Long-Term Fund. If such a strategy leaves you uncomfortable, we have other
options. We'll be happy to help you craft a portfolio with which you are
comfortable.
Sincerely,
Michael J.C. Roth, CFA
President and
Vice Chairman of the Board
For more complete information about the mutual funds managed and distributed by
USAA Investment Management Company, including charges and operating expenses,
please call for a prospectus. Read it carefully before investing.
Some income may be subject to state or local taxes or the federal alternative
minimum tax.
Investment Review
USAA CALIFORNIA BOND FUND
OBJECTIVE: High level of current interest income that is exempt from federal and
California state income taxes.
TYPES OF INVESTMENTS: Invests primarily in long-term, investment-grade
California tax-exempt securities.
- --------------------------------------------------------------------------------
3/31/99 9/30/99
================================================================================
Net Assets $641.7 Million $618.9 Million
Net Asset Value Per Share $11.29 $10.56
Tax-Exempt Dividends Per Share Last 12 Months $.588 $.581
Capital Gains Distributions Per Share Last 12 Months - -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Six-Month Total Return and 30-day SEC Yield* as of 9/30/99
- --------------------------------------------------------------------------------
3/31/99 to 9/30/99 30-day SEC Yield
-3.95%(+) 4.80%
- --------------------------------------------------------------------------------
* Calculated as prescribed by the Securities and Exchange Commission.
(+) Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Average Annual Compounded Returns with
Reinvestment of Dividends - Periods Ending September 30, 1999
- --------------------------------------------------------------------------------
Total Return Equals Dividend Return Plus Price Change
- --------------------------------------------------------------------------------
10 Years 7.23% = 6.10% + 1.13%
- --------------------------------------------------------------------------------
5 Years 7.18% = 5.80% + 1.38%
- --------------------------------------------------------------------------------
1 Year -3.00% = 4.93% + -7.93%
- --------------------------------------------------------------------------------
Annual Total Returns and Compounded Dividend Returns
for the Ten-Year Period Ended September 30, 1999
A chart in the form of a bar graph appears here, illustrating the Annual Total
Returns and Compounded Dividend Returns of the USAA California Bond Fund for the
Ten-year period ended September 30, 1999.
Total Return for Years Ended:
- ----------------------------
09/30/90 6.19%
09/30/91 13.17%
09/30/92 9.38%
09/30/93 13.96%
09/30/94 -5.14%
09/30/95 11.24%
09/30/96 8.34%
09/30/97 9.85%
09/30/98 10.15%
09/30/99 -3.00%
**Compounded Dividend Yield for Years Ended:
- -------------------------------------------
09/30/90 6.91%
09/30/91 7.26%
09/30/92 6.54%
09/30/93 6.35%
09/30/94 5.06%
09/30/95 6.47%
09/30/96 6.02%
09/30/97 5.97%
09/30/98 5.69%
09/30/99 4.93%
Change in Share Price:
- ---------------------
09/30/90 -0.72%
09/30/91 5.91%
09/30/92 2.84%
09/30/93 7.61%
09/30/94 -10.20%
09/30/95 4.77%
09/30/96 2.32%
09/30/97 3.88%
09/30/98 4.46%
09/30/99 -7.93%
** Compounded Dividend yield calculation includes only income distributions.
Total return equals dividend return plus share price change and assumes
reinvestment of all dividends and capital gains distributions. Dividend return
is the income from dividends received over the period assuming reinvestment of
all dividends. Share price change is the change in net asset value over the
period adjusted for capital gains distributions. No adjustment has been made for
taxes payable by shareholders on their reinvested dividends and capital gains
distributions. The performance data quoted represent past performance and are
not an indication of future results. Investment return and principal value of an
investment will fluctuate, and an investor's shares, when redeemed, may be worth
more or less than their original cost.
12-Month Dividend Yield Comparison
A chart in the form of a bar graph appears here illustrating the comparison of
the 12 Month Dividend Yield of the USAA California Bond Fund to the 12 Month
Dividend Yield of the Lipper California Municipal Debt Funds Average from
9/30/91 to 9/30/99.
USAA California Bond Lipper California Municipal
Fund Yield Debt Funds Average Yield
-------------------- ---------------------------
09/30/90 6.82% 6.79%
09/30/91 6.53% 6.42%
09/30/92 6.10% 6.08%
09/30/93 5.41% 5.36%
09/30/94 5.84% 5.77%
09/30/95 5.80% 5.35%
09/30/96 5.71% 5.10%
09/30/97 5.48% 4.86%
09/30/98 5.18% 4.54%
09/30/99 5.50% *
The 12-month dividend yield is computed by dividing income dividends paid during
the previous 12 months by the latest month-end net asset value adjusted for
capital gains distributions. The graph represents data for periods ending
9/30/91 to 9/30/99.
* Information from Lipper Analytical Service, Inc. was not available at press
time.
Cumulative Performance Comparison
A chart in the form of a line graph appears here, comparing the cumulative
performance of a $10,000 Investment for the USAA California Bond Fund, Lehman
Brothers Municipal Bond Index and the Lipper California Municipal Debt Funds
Average. The data is from 9/30/89 through 9/30/99. The data points from the
graph are as follows:
USAA California Bond Fund
Year Amount
---- ------
09/30/89 $10,000
03/31/90 10,376
09/30/90 10,619
03/31/91 11,358
09/30/91 12,017
03/31/92 12,439
09/30/92 13,144
03/31/93 14,000
09/30/93 14,979
03/31/94 14,043
09/30/94 14,209
03/31/95 15,010
09/30/95 15,807
03/31/96 16,414
09/30/96 17,125
03/31/97 17,498
09/30/97 18,813
03/31/98 19,656
09/30/98 20,722
03/31/99 20,926
09/30/99 20,099
Lehman Brothers Municipal Bond Index
Year Amount
---- ------
09/30/89 $10,000
03/31/90 10,430
09/30/90 10,680
03/31/91 11,392
09/30/91 12,088
03/31/92 12,531
09/30/92 13,351
03/31/93 14,099
09/30/93 15,053
03/31/94 14,426
09/30/94 14,685
03/31/95 15,498
09/30/95 16,327
03/31/96 16,797
09/30/96 17,313
03/31/97 17,712
09/30/97 18,874
03/31/98 19,610
09/30/98 20,519
03/31/99 20,825
09/30/99 20,376
Lipper California Municipal Debt Funds Average
Year Amount
---- ------
09/30/89 $10,000
03/31/90 10,357
09/30/90 10,525
03/31/91 11,180
09/30/91 11,858
03/31/92 12,235
09/30/92 12,975
03/31/93 13,767
09/30/93 14,742
03/31/94 14,035
09/30/94 14,132
03/31/95 14,858
09/30/95 15,489
03/31/96 15,956
09/30/96 16,513
03/31/97 16,795
09/30/97 17,966
03/31/98 18,632
09/30/98 19,539
03/31/99 19,681
09/30/99 18,970
Data from 9/30/89 through 9/30/99
The broad-based Lehman Brothers Municipal Bond Index is an unmanaged index that
tracks total return performance for the long-term, investment-grade, tax-exempt
bond market. The Lipper California Municipal Debt Funds Average is the average
performance level of all California municipal debt funds, as computed by Lipper
Analytical Services, Inc., an independent organization that monitors the
performance of mutual funds. All tax-exempt bond funds will find it difficult to
outperform the Lehman Index since funds have expenses.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER: ROBERT R. PARISEAU, CFA, APPEARS HERE]
A CHANGE IN SENTIMENT SHAKES THE MARKET
Fixed-income investors were reminded this year that the financial markets look
to the future -- not the past or even the present. Although most economic
statistics released this year suggest that inflation is well under control, the
fixed-income markets are clearly anticipating higher rates of inflation. After
all, reported inflation statistics such as the Consumer Price Index (CPI) are
historical numbers -- even though they may be only a month old. Higher inflation
causes bond prices to fall because inflation decreases the value of future
interest payments.
With a seemingly endless American economic expansion that, at times, seems to be
gaining strength, a bear market psychology has taken hold in the fixed-income
markets. Economists and investors wonder just how much longer economic growth
can continue in the United States without causing higher prices.
After falling to levels not seen in years, some inflation indicators have
increased slightly in 1999. Will inflation continue to rise or will it stabilize
at slightly higher levels than in 1998? This uncertainty has shaken the
confidence of many fixed-income investors. If inflation has stabilized, then the
rise in interest rates is probably closer to the end than the beginning -- given
current economic conditions.
The yield on the 30-year U.S. Treasury bond (the long bond) has steadily risen
from 5.625% to 6.05% from March 31 to September 30, 1999. The yield on the Bond
Buyer 40-Bond Index (BBI40) faired worse. The municipal market under-performed
the Treasury market as the BBI40 began the period at 5.23%, or 93% of the long
bond, and ended at 5.89% on September 30, or 97% of the long bond.
Municipal and U.S. Treasury Bond Yields
A chart in the form of a line graph appears here illustrating the yields of the
30-year U.S. Treasury Bond and the Bond Buyer 40-Bond Index (BBI40) from 3/31/99
to 9/30/99.
30-year Bond Buyer
U.S. 40-Bond
Treasury Index (BBI40)
-------- -------------
03/31/99 5.63% 5.23%
04/15/99 5.53% 5.21%
04/30/99 5.66% 5.28%
05/14/99 5.92% 5.38%
05/31/99 5.83% 5.37%
06/15/99 6.11% 5.53%
06/30/99 5.96% 5.55%
07/15/99 5.92% 5.50%
07/30/99 6.10% 5.59%
08/16/99 6.09% 5.88%
08/31/99 6.06% 5.78%
09/15/99 6.10% 5.86%
09/30/99 6.05% 5.89%
Note: Past performance is no guarantee of future results
The 30-year U.S. Treasury bond is generally considered the benchmark for U.S.
long-term interest rates.
The Bond Buyer 40-Bond Index is the industry standard for the yield of
long-term, investment-grade municipal bonds.
INCOME STRATEGY
I consistently follow an income strategy for this Fund similar to that used by
other USAA tax-exempt funds. I focus primarily on generating maximum tax-exempt
income with the goal of producing the best after-tax total return over a three-
to five-year investment horizon. I remain fully invested in long-term,
investment-grade municipal bonds. My primary justifications for this strategy
are simple in concept:
- I believe that a large number of our investors own the Fund for the
tax-free income and invest for the long term -- meaning three to five
years or more.
- Although past performance is no guarantee of future results, the strategy
has worked in different kinds of markets over the years. Long-term
performance, measured by total return, has been well above the peer-group
average.
Although the Fund has behaved as expected given the increase in interest rates,
this year's total return performance has been very disappointing and
frustrating. Why does this income strategy produce such apparently contradictory
results -- weak short-term total return performance in 1999 but above-average
performance for long-term total return? Income performance is well above average
in the short and long term.
Of course, in the short run, price change can overwhelm the income distribution
to create a negative total return for a given period. I believe that an income
strategy works because, over time, the vast majority of your total return from a
fixed-income security will be from the income. Price changes tend to even out
over longer investment horizons. Please refer to the table and chart on page 4.
YOUR INVESTMENT HORIZON IS IMPORTANT!
I consistently invest the Fund in long-term, investment-grade, tax-exempt
municipal securities. Why long-term bonds? Because bonds maturing in 20 years or
longer almost always yield more than shorter bonds of the same credit quality.
However, longer-maturity bonds are more volatile in price than shorter-maturity
bonds. In regard to credit risk, I believe investment-grade bonds (rated BBB or
higher) offer the best risk/reward compared to either junk bonds or insured
bonds. That's why we encourage only those investors with a three- to five-year
investment horizon to buy our tax-exempt bond funds. These long-term investors
seeking high current income must be willing to assume moderate credit risk and
price volatility in return.
A TIME TO REFLECT
Because interest rates have risen in 1999, investors have suffered for owning
any kind of long-maturity bond -- municipals, corporates, or governments. That's
the mathematics of bond investing. An investor can mitigate, but not eliminate,
the volatility risk by investing for the long term. Although our strategy has
produced good results for our investors in the past, to guard against
complacency, we are constantly examining and analyzing our investment
strategies.
Is there a better way to invest a tax-exempt bond fund? An alternative to an
income strategy is to focus on total return. However, a total-return strategy
requires the manager to successfully time the market cycles by correctly
forecasting interest rates again and again over extended periods of time. No
person, to my knowledge, has ever done that.
Enduring a bear market like 1999 can be very unsettling. It's a good time to
review why you purchased the Fund in the first place:
- Are you most interested in receiving a high level of interest income
that is free of federal and state taxes?
- Is your investment horizon long enough to cope with the ups and downs
of the market?
- Do you need to raise cash? Do you maintain a sufficient cash reserve?
- Are you comfortable with the moderate credit risk of investment-grade
municipal bonds? (Please review the Portfolio Ratings Mix chart on
page 10.)
I view the current environment as an opportunity to increase the Fund's
distribution yield by buying bonds that offer very attractive yields at value
prices.
YOUR FUND'S PERFORMANCE * * * *
I'm pleased to say that your Fund received an Overall Star Rating of four stars
in the municipal bond fund category from Morningstar Rating(Trademark) for the
period ended September 30, 1999. Your Fund's net asset value (NAV) per share
decreased by $0.73, or -6.47%, since March 31, 1999.
While past performance is no guarantee of future results, the Fund's annualized
dividend distribution yield for the past six months was 5.46%. At press time,
Lipper yield data was not available for the same time period. The Fund's total
return was -3.95% compared to Lipper's California Municipal Debt Fund Average of
- -3.73% for the 100 funds in the category.
Past performance is no guarantee of future results. Morningstar proprietary
ratings reflect historical risk-adjusted performance as of September 30, 1999.
The ratings are subject to change every month. Morningstar ratings are
calculated from the Fund's three-, five-, and ten-year average annual returns in
excess of 90-day Treasury bill returns with appropriate fee adjustments and a
risk factor that reflects fund performance below 90-day T-bill returns. Overall
rating is a weighted average of a fund's three-, five-, and ten-year ratings, as
applicable. The USAA California Bond Fund received five, five, and three stars
for the three-, five-, and ten-year periods, respectively. The top 10% of the
funds in a broad asset class receive five stars, the next 22.5% receive four
stars, and the next 35% receive three stars. The Fund was rated among 1,611,
1,241, and 375 funds in the municipal bond fund category for the three-, five-,
and ten-year periods, respectively.
Dividend yield is computed by dividing income dividends paid during the previous
six months by the latest month-end net asset value adjusted for capital gains
distributions and annualizing the result.
Refer to the bottom of page 5 for the Lipper Average definition.
Total return equals income return plus share price change and assumes
reinvestment of all dividends and capital gains distributions.
THE STATE OF CALIFORNIA
California's economy continues to exceed expectations. The unemployment rate, a
key economic indicator, improved from 5.9% in August 1998 to 5.1% in August
1999. Because personal income growth has been notably strong, personal income
tax collections increased 9.2% over fiscal 1997-98 levels. The income tax, which
comprises approximately one-half of general fund revenues, was a key factor in
achieving a general fund balance of $2.4 billion as of June 30, 1999.
The increase of California's general fund has improved the state's fiscal
health. Such technical measures as "borrowable resources" between accounts
within the general fund has increased from $6.9 billion June 30, 1998, to $8.7
billion June 30, 1999 -- the highest level seen in many years. The general fund
also borrowed less money, with debt falling from $1.7 billion in fiscal 1998-99
to $1.0 billion in fiscal 1999-2000. The credit rating agencies take great stock
in such indicators of financial flexibility and liquidity.
The state's debt position is moderate. Currently, debt service represents
approximately 4.2% of general fund revenues. Credit ratings on the state's
general obligation debt are Aa3 by Moody's Investors Service, AA- by Fitch IBCA,
and AA- from Standard and Poor's -- which was upgraded from A+ in August.
I discuss these general economic issues because, although they may not directly
relate to each of your Fund's holdings, they do indicate the general financial
and economic environment of the state. We will closely monitor those specific
credit issues, ballot initiatives, and litigation that could potentially impact
the value of your holdings.
TAXABLE EQUIVALENT YIELDS
The table below compares the yield of the USAA California Bond Fund with a
taxable equivalent investment.
To match the USAA California Bond Fund's closing 30-day SEC yield of 4.80% and:
- --------------------------------------------------------------------------------
Assuming a California state tax rate of: 4.00% 8.00% 9.30% 9.30% 9.30%
and a marginal federal tax rate of: 15% 28% 31% 36% 39.6%
- --------------------------------------------------------------------------------
A fully taxable investment must pay: 6.14% 7.25% 7.67% 8.27% 8.76%
- --------------------------------------------------------------------------------
This table is based on a hypothetical investment calculated for illustrative
purposes only. It is not an indication of performance for any of the USAA family
of funds.
Portfolio Ratings Mix
September 30, 1999
A pie chart is shown here depicting the Portfolio Ratings Mix as of September
30, 1999 of the USAA California Bond Fund to be:
AAA - 40.6%; AA - 20.9%; A - 25.6%; Cash Equivalents - 2.4%; and BBB - 10.5%.
The four highest long-term credit ratings, in descending order of credit
quality, are AAA, AA, A, and BBB. This chart reflects the higher rating of
either Moody's Investors Service, Standard & Poor's Rating Group, or Fitch IBCA.
Unrated securities that have been determined by USAA IMCO to be of equivalent
investment quality to categories AAA and BBB account for 2.5% and 0.4%,
respectively, of the Fund's investments, and are included in their appropriate
category above.
Note: Some income may be subject to federal, state, or local taxes, or the
federal alternative minimum tax.
See page 17 for a complete listing of the Portfolio of Investments.
Investment Review
USAA CALIFORNIA MONEY MARKET FUND
OBJECTIVE: High level of current interest income that is exempt from federal and
California state income taxes and a further objective of preserving capital and
maintaining liquidity.
TYPES OF INVESTMENTS: Invests primarily in high-quality, California tax-exempt
securities with maturities of 397 days or less. The Fund will maintain a
dollar-weighted average portfolio maturity of 90 days or less and will endeavor
to maintain a constant net asset value per share of $1.00.*
*An investment in a money market fund is not insured or guaranteed by the FDIC
or any government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Fund.
- --------------------------------------------------------------------------------
3/31/99 9/30/99
- --------------------------------------------------------------------------------
Net Assets $439.2 Million $401.3 Million
Net Asset Value Per Share $1.00 $1.00
- --------------------------------------------------------------------------------
Average Annual Total Returns and 7-Day Yield as of 9/30/99
- --------------------------------------------------------------------------------
3/31/99 Since Inception 7-Day
to 9/30/99 1 Year 5 Years on 8/1/89 Yield
1.40%(+) 2.79% 3.26% 3.50% 3.22%
- --------------------------------------------------------------------------------
(+) Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
Total return equals income return and assumes reinvestment of all dividends and
any capital gains distributions. No adjustment has been made for taxes payable
by shareholders on their reinvested dividends and capital gains distributions.
Past performance is no guarantee of future results. Yields and returns
fluctuate. The 7-day yield quotation more closely reflects current earnings of
the Fund than the total return quotation.
7-Day Yield Comparison
A chart in the form of a line graph appears here illustrating the comparison of
the 7-day Yield of the USAA California Money Market Fund and the IBC Financial
Data, Inc. State Specific SB (Stock Broker) and GP (General Purpose) (Tax-Free):
California Money Funds.
USAA California
Money Market Fund IBC Financial Data, Inc.
----------------- ------------------------
03/29/99 2.65% 2.31%
04/26/99 3.01% 2.67%
05/31/99 2.88% 2.55%
06/28/99 3.09% 2.80%
07/26/99 2.60% 2.28%
08/30/99 2.76% 2.44%
09/27/99 3.12% 2.75%
Data represent the last Monday of each month.
Ending date 9/27/99
The graph tracks the Fund's 7-day yield against IBC Financial Data, Inc. State
Specific SB (Stock Broker) & GP (General Purpose) (Tax-Free): California Money
Funds, an average of money market fund yields.
Message from the Manager
[PHOTOGRAPH OF PORTFOLIO MANAGER: REGINA G. SHAFER, CFA, APPEARS HERE]
THE MARKET
Since our last shareholder report, the national economy has continued to
strengthen. Consumer confidence has been very high due, in part, to continued
strong employment. In August, national unemployment reached the lowest levels of
the decade -- 4.2%. This strong economy has caused the Federal Reserve Board to
take action in order to keep inflation in check. The Federal Open Market
Committee has raised the federal funds rate (the interest rate banks charge
other banks) twice since March -- an increase of 0.25% in both June and August
- -- to bring the federal funds rate to 5.25%. During this time period, the
30-year Treasury rate ranged from 5.4% in April to 6.3% in August. One-year
municipal note yields have also inched up over the last six months. According to
the Bond Buyer One-Year Note Index, municipal notes have risen from a low of
3.05% in April to a high of 3.73% as of September. California note levels have
been lower than the national note averages due to a different supply and demand
environment.
STRATEGY
Instead of trying to determine where interest rates will be in the near term, we
continue to focus on finding relative value. Our credit research team
contributes to this effort by assessing the creditworthiness of each issue that
the Fund purchases. The Fund's average maturity of 53 days on September 30 is
notably longer than the 32 days average maturity just six months ago. There are
two primary reasons for the longer maturity. First, there were attractive levels
on many California notes, the majority of which were issued in June. Second, the
Fund has been defensively postured for the interest rate drops that occur with
the shorter-term variable-rate notes each year beginning in July.
This year, the California short-term variable-rate notes actually remained lower
for a longer period due to the high demand for such tax-exempt securities. This
allowed the defensive posturing to pay off in the form of better performance.
This higher-than-normal demand has been a result of the strong California
economy. There have been fewer short-term notes issued by counties, cities, and
schools -- lower supply, and greater wealth in California looking for tax-exempt
income -- higher demand. This combination of lower supply and higher demand has
kept the yield on California short-term paper low.
PERFORMANCE
For the 12 months ending September 30, 1999, the USAA California Money Market
Fund ranked 3 out of 48 California money market funds according to IBC Financial
Data, Inc., with a return of 2.79%. The average return for the category over the
same period was 2.46%. Please keep in mind that past performance is no guarantee
of future results.
The Bond Buyer One-Year Note Index is representative of yields on ten large
one-year tax-exempt notes.
Variable-rate demand notes represent borrowings that are payable on demand and
that bear interest reflective of a money market rate.
IBC Financial Data, Inc. provides independent analysis of trends in the
financial services and investing industries, with particular concentration on
money market funds.
CALIFORNIA
California continues to benefit from a very strong, robust economy. Unemployment
levels of 5.1% in August were the lowest for the state since 1990. Furthermore,
state unemployment levels are just 0.9% above the national level, the smallest
difference in over a decade. Employment has reached record levels, with over 14
million jobs for the first time ever. Single-family home sales are also reaching
new heights.
Not surprisingly, California's financial position has benefited from its
economic expansion. The state is believed to have ended the 1999 fiscal year
with a $2.4 billion reserve. This was about $1.3 billion better than the state
had projected earlier when there were concerns about the effect of the Asian flu
on the California economy. The 1999-2000 budget reflects an 8% increase in
revenues and expenditures. Major budget features include increased funding for
education, health/human services, and infrastructure, as well as one-time
expenditures to local governments.
In August, Standard and Poor's increased the bond rating on the state general
obligation debt to AA- from A+, reflecting the state's economic strength and
solid financial performance. Moody's Investors Service and Fitch IBCA rate the
state Aa3 and AA-, respectively.
Cumulative Performance of $10,000
A chart in the form of a line graph appears here illustrating the cumulative
performance of a $10,000 investment of the USAA California Money Market Fund.
The data is from 9/30/89 to 9/30/99. The data points from the graph are as
follows:
USAA California Money Market Fund
Year Amount
---- ------
09/30/89 $10,000
03/31/90 10,279
09/30/90 10,561
03/31/91 10,838
09/30/91 11,072
03/31/92 11,275
09/30/92 11,437
03/31/93 11,575
09/30/93 11,708
03/31/94 11,831
09/30/94 11,979
03/31/95 12,180
09/30/95 12,402
03/31/96 12,616
09/30/96 12,820
03/31/97 13,023
09/30/97 13,244
03/31/98 13,459
09/30/98 13,679
03/31/99 13,866
09/30/99 14,061
Data from 9/30/89 through 9/30/99
Past performance is no guarantee of future results, and the value of your
investment will vary according to the Fund's performance. Some income may be
subject to federal, state, or local taxes, or to the federal alternative minimum
tax. For the 7-day yield information, please refer to the Fund's Investment
Review page.
See page 21 for a complete listing of the Portfolio of Investments.
Shareholder Voting Results
On October 15, 1999, a special meeting of shareholders was held to vote on the
following proposals. All proposals were approved by the shareholders. All
shareholders of record on August 19, 1999, were entitled to vote on each
proposal. The number of votes shown below are shown for the entire USAA Tax
Exempt Fund, Inc. (the Company) for proposals 1 and 2.
1 Proposal to elect a Board of Directors as follows:
DIRECTORS VOTES FOR VOTES WITHHELD
Robert G. Davis 1,653,325,550 19,504,676
Michael J.C. Roth 1,653,325,550 19,504,676
David G. Peebles 1,653,325,550 19,504,676
Robert L. Mason 1,653,325,550 19,504,676
Michael F. Reimherr 1,653,325,550 19,504,676
Richard A. Zucker 1,653,325,550 19,504,676
Barbara B. Dreeben 1,653,325,550 19,504,676
John W. Saunders, Jr. and Howard L. Freeman, Jr. did not stand for re-election
to the Board. Their term of office will terminate on December 31, 1999.
2 Proposal to ratify or reject the selection by the Board of Directors of KPMG
LLP as auditors for the Company for the fiscal year ending March 31, 2000.
NUMBER OF SHARES VOTING
- --------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
1,631,286,201 19,197,037 22,346,988
CATEGORIES & DEFINITIONS
PORTFOLIOS OF INVESTMENTS
September 30, 1999
(Unaudited)
Fixed-Rate Instruments - consist of municipal bonds, notes, and commercial
paper. The interest rate is constant to maturity. Prior to maturity, the market
price of a fixed-rate instrument generally varies inversely to the movement of
interest rates.
Put Bonds - provide the right to sell the bond at face value at specific tender
dates prior to final maturity. The put feature shortens the effective maturity
of the security.
Variable-Rate Demand Notes (VRDN) - provide the right, on any business day, to
sell the security at face value on either that day or in seven days. The
interest rate is generally adjusted at a stipulated daily, weekly, or monthly
interval to a rate that reflects current market conditions. In money market
funds, the effective maturity of these instruments is deemed to be less than 397
days in accordance with regulatory requirements. In bond funds, the effective
maturity is the next put date.
Credit Enhancements - add the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal when due. The
enhancement may be provided by either a high-quality bank, insurance company or
other corporation, or a collateral trust.
The USAA California Money Market Fund's investments consist of securities
meeting the requirements to qualify as "eligible securities" under the
Securities and Exchange Commission (SEC) rules applicable to money market funds.
With respect to quality, "eligible securities" generally consist of securities
rated in one of the two highest categories for short-term securities, or, if not
rated, of comparable quality, at the time of purchase. The Manager also attempts
to minimize credit risk in the USAA California Money Market Fund through
rigorous internal credit research.
(ETM) Escrowed to final maturity.
(PRE) Prerefunded to a date prior to maturity.
(LOC) Enhanced by a bank letter of credit.
(NBGA) Enhanced by a non-bank guarantee agreement.
(INS) Scheduled principal and interest payments are insured by:
(1) MBIA, Inc.
(2) AMBAC Financial Group, Inc.
(3) Financial Guaranty Insurance Co.
(4) Financial Security Assurance Holdings Ltd.
(5) College Construction Loan Insurance Association.
(6) ACA Financial Guaranty Corp.
PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
CAB Capital Appreciation Bond MFH Multi-Family Housing
COP Certificate of Participation PCRB Pollution Control Revenue Bond
CP Commercial Paper RB Revenue Bond
GO General Obligation TRAN Tax Revenue Anticipation Note
IDA Industrial Development
Authority/Agency
<TABLE>
USAA CALIFORNIA BOND FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1999
(Unaudited)
<CAPTION>
Principal Coupon Final Market
Amount Security Rate Maturity Value
- -----------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FIXED-RATE INSTRUMENTS (97.9%)
California (94.5%)
Alameda Corridor Transportation Auth. CAB,
$12,625 Series 1999A (INS)(1),(a) 5.40% 10/01/2030 $ 2,053
15,500 Series 1999A (INS)(1),(a) 5.40 10/01/2031 2,370
33,380 Series 1999A (INS)(1),(a) 5.41 10/01/2032 4,807
16,600 Series 1999A (INS)(1),(a) 5.65 10/01/2033 2,251
3,000 Alameda Housing Auth. MFH RB,
Series 1998A 5.35 2/20/2031 2,769
7,500 Antelope Valley Healthcare District RB,
Series 1997B (INS)(4) 5.20 1/01/2027 6,899
2,000 Association of Bay Area Governments
Finance Auth. COP, Series 1998 (NBGA) 5.13 5/15/2023 1,803
Burbank Unified School District GO,
4,025 Series 1998B (INS)(3),(a) 5.30 8/01/2022 1,068
3,130 Series 1998B (INS)(3),(a) 5.30 8/01/2023 782
30,000 Central Valley Finance Auth. RB,
Series 1993 (PRE) 6.20 7/01/2020 32,569
Commerce Community Development
Commission Tax Allocation Bonds,
3,740 Series 1997A, Project #1 (INS)(1),(a) 5.50 8/01/2022 993
3,740 Series 1997A, Project #1 (INS)(1),(a) 5.50 8/01/2023 934
2,650 Contra Costa Water District RB,
Series 1994G (INS)(1) 5.50 10/01/2019 2,611
5,400 Department of Water Resources RB,
Series L 5.75 12/01/2019 5,429
5,000 Desert Hospital District COP (PRE) 6.39 7/28/2020 5,349
Educational Facilities Auth. RB,
9,500 Series 1991 (PRE) 7.15 5/01/2021 10,159
1,775 Series 1992 (PRE) 6.88 9/01/2022 1,945
8,990 Series 1992 (PRE) 6.50 10/01/2022 9,774
5,000 Series 1992 (Pomona College) 6.00 2/15/2017 5,177
9,000 Series 1994 (National University) (INS)(5) 6.20 5/01/2021 9,346
8,015 Series 1995 (Redland University) 6.00 10/01/2025 8,079
8,050 Series 1995A (California Education Pool) 5.60 12/01/2020 7,859
Fallbrook Union High School District GO,
3,000 Series 1998 (INS)(3),(a) 5.40 9/01/2018 1,022
3,360 Series 1998 (INS)(3),(a) 5.40 9/01/2019 1,070
Fontana Unified School District GO
Convertible Zero Coupon,
2,500 Series 1990D (INS)(3),(a) 5.80 5/01/2017 2,409
2,000 Series 1990D (INS)(3),(a) 5.85 5/01/2022 1,901
8,270 Foothill/Eastern Transportation
Corridor Agency RB, Series 1995A 5.00 1/01/2035 7,025
2,270 Fresno COP, Series 1991 8.50 5/01/2016 2,352
Health Facilities Financing Auth. RB,
8,000 Series 1990 (PRE) 7.50 10/01/2010 8,462
6,500 Series 1990A (NBGA) 7.70 9/01/2010 6,834
35,000 Series 1990A (PRE)(d) 6.50 12/01/2020 36,814
11,500 Series 1991 (PRE) 6.75 6/01/2021 12,233
3,175 Series 1992A (INS)(1) 6.38 10/01/2022 3,361
3,500 Series 1993C (Kaiser) 5.60 5/01/2033 3,291
2,000 Series 1994 (NBGA) 6.50 9/01/2014 2,117
5,000 Series 1994A (Scripps Research Institute) 6.63 7/01/2018 5,286
1,000 Series 1997A (NBGA) 5.50 1/01/2019 951
2,320 Series 1998A (NBGA) 5.25 5/01/2021 2,123
3,325 Series 1998A (NBGA) 5.30 11/01/2028 3,038
4,000 Series 1998A (Catholic Healthcare West) 5.00 7/01/2028 3,232
5,000 Series 1998B (Kaiser) 5.00 10/01/2020 4,437
4,180 Hollister Joint Powers Financing Auth. RB 5.90 12/01/2023 4,135
Housing Finance Agency Home Mortgage RB,
10,310 Series 1991F (d) 6.85 8/01/2017 10,716
5,990 Series 1994A 6.55 8/01/2026 6,209
3,000 Housing Finance Agency MFH RB,
Series 1996A (INS)(2) 6.05 8/01/2027 3,070
1,500 Housing Finance Agency RB, Series 1997D 5.85 8/01/2017 1,517
5,455 Imperial Beach MFH RB, Series 1995A 6.45 9/01/2025 5,734
Infrastructure and Economic
Development RB,
2,500 Series 1999 (INS)(6) 5.70 12/01/2019 2,424
500 Series 1999 (INS)(6) 5.75 12/01/2024 490
7,000 Series 1999 (INS)(6) 5.80 12/01/2029 6,877
Metropolitan Water District RB,
5,000 Series 1992 5.50 7/01/2019 4,955
21,750 Series 1998A 4.75 7/01/2022 18,920
3,000 Mojave Water Agency Improvement
District GO, Series 1992 (PRE) 6.60 9/01/2022 3,267
4,855 Murrieta Valley Unified School District GO,
Series 1998A (INS)(3),(a) 5.28 9/01/2018 1,653
New Haven Unified School District GO,
14,725 Series 1996B (INS)(3),(a) 5.52 8/01/2022 3,864
10,975 Series 1997A (INS)(4),(a) 6.10 8/01/2021 3,067
10,330 Pleasanton Joint Powers Financing Auth. RB,
Series 1993A 6.15 9/02/2012 10,694
13,400 Riverside County Public Financing Auth.
Tax Allocation RB, Series 1997A 5.63 10/01/2033 12,703
6,500 Sacramento Cogeneration Auth. RB,
Series 1995 (PRE) 6.50 7/01/2021 7,275
Sacramento Power Auth. RB,
3,700 Series 1995 (Cogeneration Project) 5.88 7/01/2015 3,696
6,000 Series 1995 (Cogeneration Project) 6.00 7/01/2022 5,995
7,040 San Diego MFH RB, Series 1995A 6.45 5/01/2025 7,365
San Diego Unified School District CAB,
6,940 Series 1999A (INS)(3),(a) 5.54 7/01/2020 2,091
15,160 Series 1999A (INS)(3),(a) 5.55 7/01/2021 4,293
8,440 Series 1999A (INS)(3),(a) 5.56 7/01/2022 2,250
18,000 San Francisco Bay Area RB, Series 1999(c) 5.50 7/01/2029 17,473
San Joaquin Hills Transportation
Corridor Agency RB,
13,500 Series 1993 (PRE) 6.75 1/01/2032 14,830
10,035 Series 1993 5.00 1/01/2033 8,602
97,650 Series 1997A (INS)(1),(a) 5.67 1/15/2032 14,588
11,320 San Mateo Sewer RB,
Series 1992 (PRE)(INS)(2) 6.30 8/01/2017 12,217
12,455 Southern California Public Power Auth. RB,
Series 1989 (LOC) 6.00 7/01/2018 12,484
State GO,
13,050 Series 1998 5.00 10/01/2023 11,761
22,100 Series 1998 5.00 10/01/2027 19,708
10,000 Series 1999 5.50 9/01/2024 9,729
Statewide Communities Development
Auth. COP,
13,500 Huntington Memorial Hospital (INS)(5) 5.80 7/01/2026 13,471
5,420 Lutheran Homes (NBGA) 5.75 11/15/2021 5,486
4,000 San Gabriel Valley (NBGA) 5.50 9/01/2014 4,264
1,055 The Arc of San Diego (NBGA) 5.63 5/01/2021 1,023
Suisun City Public Financing Auth. RB,
17,855 Series 1998A (a) 5.37 10/01/2028 3,026
20,080 Series 1998A (a) 5.37 10/01/2033 2,497
Univ. of California RB,
12,000 Series 1991A (PRE)(d) 6.88 9/01/2016 13,159
4,000 Series 1996 (INS)2 5.75 7/01/2024 4,007
18,000 Vallejo Sanitation and Flood Control COP,
Series 1993 (INS)3 5.00 7/01/2019 16,606
Washington Township Health Care
District RB,
7,085 Series 1999 5.13 7/01/2023 6,300
3,005 Series 1999 5.25 7/01/2029 2,677
Washington Township Hospital RB,
11,000 Series 1993 5.50 7/01/2018 10,415
7,845 Series 1993 5.25 7/01/2023 7,118
Watsonville Hospital RB,
5,000 Series 1995A (PRE)(NBGA) 6.35 7/01/2024 5,567
1,515 Series 1996A (ETM)(NBGA) 6.20 7/01/2012 1,645
Puerto Rico (3.4%)
Electric Power Auth. RB,
10,000 Series 1995 X (PRE) 6.13 7/01/2021 11,037
10,500 Series 1995Z 5.25 7/01/2021 9,772
- -----------------------------------------------------------------------------------------
Total fixed-rate instruments (cost: $597,606) 605,706
- -----------------------------------------------------------------------------------------
VARIABLE-RATE DEMAND NOTE (2.4%)
California
14,810 State Financing Auth. PCRB,
Series 1996C (LOC) (cost: $14,810) 3.70 11/01/2026 14,810
- -----------------------------------------------------------------------------------------
Total investments (cost: $612,416) $620,516
=========================================================================================
</TABLE>
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
Escrowed Bonds 30.1%
Hospitals 12.8
General Obligations 10.8
Water/Sewer Utilities - Municipal 8.5
Electric/Gas Utilities - Municipal 5.2
Real Estate Tax/Free 5.0
Education 4.9
Toll Roads 4.9
Multi-Family Housing 3.0
Single-Family Housing 3.0
Sales Tax 2.8
Electric Utilities 2.4
Airport/Port 1.8
Nursing/Continuing Care Centers 1.7
Community Service 1.6
Health Care - Miscellaneous 1.4
Buildings .4
-----
Total 100.3%
=====
<TABLE>
USAA CALIFORNIA MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
(IN THOUSANDS)
September 30, 1999
(Unaudited)
<CAPTION>
Principal Coupon Final
Amount Security Rate Maturity Value
- -------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
VARIABLE-RATE DEMAND NOTES (68.7%)
California (67.0%)
$9,000 Alameda County IDA RB, Series 1994 3.90% 6/01/2004 $ 9,000
8,700 Contra Costa County MFH RB,
Series 1990A (LOC) 3.75 8/01/2007 8,700
8,500 Corona MFH RB, Series 1985B (NBGA)(b) 3.50 2/01/2005 8,500
Fremont COP,
6,275 Series 1990 (LOC) 3.50 7/01/2015 6,275
4,400 Series 1991 (LOC) 3.50 8/01/2022 4,400
2,000 Hacienda Puente Unified School District
COP (LOC) 3.65 10/01/2009 2,000
2,015 Hesperia Public Financing Auth. Lease RB,
Series 1998B (LOC) 3.65 6/01/2022 2,015
4,800 Huntington Beach MFH RB,
Series 1985A (LOC) 4.00 2/01/2010 4,800
8,850 Irvine Assessment District No. 89-10
Improvement Bonds (LOC) 3.50 9/02/2015 8,850
23,184 Irvine Assessment District No. 97-17
Improvement Bonds (LOC) 3.50 9/02/2023 23,184
2,400 Irvine IDA RB, Series 1985 (LOC) 4.45 11/01/2005 2,400
4,100 Irvine Ranch Water District
Consolidated Bonds, Series 1995 (LOC) 3.50 1/01/2021 4,100
2,700 Irvine Ranch Water District
Consolidated Bonds, Series 1985 (LOC) 3.50 10/01/2010 2,700
9,400 Irvine Ranch Water District COP,
Series 1986 (LOC) 3.50 8/01/2016 9,400
9,000 Lancaster MFH RB, Series 1984A (NBGA)(b) 3.70 11/01/2004 9,000
1,395 Lemoore COP, Series 1995 (LOC) 3.70 11/01/2020 1,395
6,800 Loma Linda Water RB, Series 1995 (LOC) 3.65 6/01/2025 6,800
14,000 Los Angeles Community Redevelopment
Agency COP, Series 1994 (LOC) 3.65 12/01/2014 14,000
5,000 Los Angeles Unified School District COP,
Series 1997A (LOC) 3.20 12/01/2017 5,000
4,200 Monrovia Redevelopment Agency COP,
Series 1984 (NBGA) 3.25 12/01/2014 4,200
9,750 Monterey County Financing Auth. RB,
Series 1995A (LOC) 3.45 9/01/2036 9,750
8,410 Moreno Valley COP, Series 1997 (LOC) 3.80 6/01/2027 8,410
3,200 Ontario Industrial Development Auth. RB,
Series 1985 (LOC) 3.90 4/01/2015 3,200
Orange County Apartment Development RB,
8,100 Series 1984D (LOC) 3.87 8/01/2019 8,100
7,000 Series 1985D (LOC) 5.30 4/01/2006 7,000
9,300 Rialto Public Financing Auth. Tax
Allocation RB, Series 1998A (LOC) 4.15 9/01/2027 9,300
3,500 Sacramento County Multifamily Housing RB,
Series C (NBGA) 3.40 4/15/2007 3,500
8,200 San Bernardino County COP,
Series 1996 (LOC) 3.80 11/01/2025 8,200
4,850 San Bernardino IDA RB, Series 1992 (LOC) 3.85 2/01/2012 4,850
8,800 San Diego MFH RB, Series 1993A (NBGA) 3.90 12/01/2015 8,800
3,100 San Dimas Redevelopment Agency IDA RB,
Series 1985 (LOC) 4.05 11/01/2015 3,100
3,600 San Francisco City and County MFH RB,
Series 1985A (LOC) 3.35 12/01/2005 3,600
10,020 State Financing Auth. PCRB,
Series 1996C (LOC) 3.70 11/01/2026 10,020
Statewide Communities Development
Auth. COP,
3,625 Series 1992 (LOC) 3.80 11/01/2022 3,625
2,200 Series 1992 (LOC) 3.55 12/01/2022 2,200
4,300 Series 1996 (LOC) 3.80 6/01/2026 4,300
3,200 Series 1998 (LOC) 3.90 6/01/2013 3,200
10,000 Series 1998 (LOC) 3.70 11/15/2028 10,000
21,000 Torrance Hospital RB, Series 1992 (LOC) 3.45 2/01/2022 21,000
Puerto Rico (1.7%)
6,900 Industrial Medical and Environmental
Pollution Control Facilities Financing
Auth. RB, Series 1985 (LOC) 3.80 12/01/2015 6,900
- -------------------------------------------------------------------------------------------
Total variable-rate demand notes (cost: $275,774) 275,774
- -------------------------------------------------------------------------------------------
PUT BONDS (3.8%)
California
2,660 Pollution Control Financing Auth. PCRB,
Series 1984 3.10 5/15/2002 2,660
12,700 Public Capital Improvement Finance
Auth. RB, Series 1988C (LOC) 3.35 6/01/2028 12,700
- -------------------------------------------------------------------------------------------
Total put bonds (cost: $15,360) 15,360
- -------------------------------------------------------------------------------------------
FIXED-RATE INSTRUMENTS (26.8%)
California (25.5%)
6,300 Alameda Unified School District GO TRAN,
Series 1999 3.38 6/30/2000 6,310
2,150 Auburn Unified School District GO TRAN,
Series 1999 4.13 10/01/2000 2,158
2,000 Health Facilities Financing Auth. RB,
Series 1989A (PRE) 7.00 10/01/2018 2,040
8,000 Kern High School District GO TRAN,
Series 1999 4.00 7/06/2000 8,036
4,200 Montebello GO TRAN, Series 1999 (LOC) 4.00 6/30/2000 4,212
10,000 Northern Transmission Agency CP,
Series 1999B (LOC) 2.85 10/08/1999 10,000
5,000 Orange County Fire Auth. GO TRAN,
Series 1999 4.50 7/12/2000 5,039
2,750 Oxnard School District GO TRAN,
Series 1999 4.25 7/27/2000 2,765
1,000 Placer County Office of Education TRAN,
Series 1999 4.13 10/01/2000 1,005
310 Pleasanton Unified School District GO,
Series 1997D (INS)(1) 5.50 8/01/2000 315
1,300 Rocklin Unified School District TRAN,
Series 1999 4.13 10/01/2000 1,306
2,035 Roseville City School District TRAN,
Series 1999 4.13 10/01/2000 2,044
7,000 San Joaquin County Transport Auth. CP (LOC) 3.10 10/12/1999 7,000
8,000 San Luis Coastal Unified School
District Project Notes, Series 1999 4.25 6/30/2000 8,050
2,500 San Luis Coastal Unified School
District TRAN, Series 1999 4.25 7/14/2000 2,515
12,000 San Ramon Valley Unified School
District TRAN, Series 1998-99 3.05 12/16/1999 12,000
1,000 South Orange County Public Financing
Auth. Special Tax RB, Series 1999A (INS)(4) 4.50 8/15/2000 1,008
600 State GO 4.50 10/01/1999 600
6,495 State GO 9.00 6/01/2000 6,741
10,000 State GO CP 2.85 10/05/1999 10,000
4,300 State GO CP 3.05 10/22/1999 4,300
5,000 Statewide Communities Development Auth.
TRAN, Series A1 (INS)(4) 4.00 6/30/2000 5,028
Puerto Rico (1.3%)
5,000 Government Development Bank CP,
Series 1995A 3.45 2/08/2000 5,000
- -------------------------------------------------------------------------------------------
Total fixed-rate instruments (cost: $107,472) 107,472
- -------------------------------------------------------------------------------------------
Total investments (cost: $398,606) $398,606
===========================================================================================
</TABLE>
PORTFOLIO SUMMARY BY CONCENTRATION
----------------------------------
General Obligations 20.5%
Multi-Family Housing 13.4
Water/Sewer Utilities - Municipal 8.7
Special Assessment/Tax/Fee 8.2
Buildings 7.6
Hospitals 5.2
Appropriated Debt 4.4
Nursing/Continuing Care Centers 4.1
Finance - Municipal 3.2
Manufacturing - Diversified Industries 2.8
Electric Utilities 2.5
Electric/Gas Utilities - Municipal 2.5
Lodging/Hotel 2.3
Real Estate Tax/Free 2.3
Nursing Care 2.0
Education 1.7
Sales Tax 1.7
Banks - Major Regional 1.3
Other 4.9
----
Total 99.3%
====
NOTES TO PORTFOLIOS OF INVESTMENTS
September 30, 1999
(Unaudited)
GENERAL NOTES
Values of securities are determined by procedures and practices discussed in
note 1 to the financial statements.
The cost of securities for federal income tax purposes is approximately the same
as that reported in the financial statements.
The percentages shown represent the percentage of the investments to net assets.
SPECIFIC NOTES
(a) Zero-Coupon security. Rate represents the effective yield at date of
purchase. For the USAA California Bond Fund these securities represented 9.5% of
the Fund's net assets.
(b) This security was purchased within the terms of a private placement
memorandum and is subject to a seven-day demand feature. Under procedures
adopted by the Board of Directors, the adviser has determined that this security
is liquid. At September 30, 1999, this security represented 4.3% of the USAA
California Money Market Fund's net assets.
(c) At September 30, 1999, the cost of securities purchased on a
delayed-delivery basis for the USAA California Bond Fund was $17.5 million.
(d) At September 30, 1999, these securities were segregated to cover
delayed-delivery purchases.
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
September 30, 1999
(Unaudited)
<CAPTION>
USAA
USAA California
California Money Market
Bond Fund Fund
----------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market value
(identified cost of $612,416 and $398,606, respectively) $620,516 $ 398,606
Cash 266 1,358
Receivables:
Capital shares sold 28 265
Interest 9,137 2,007
Securities sold 7,737 -
-----------------------
Total assets 637,684 402,236
-----------------------
LIABILITIES
Securities purchased 17,477 -
Capital shares redeemed 215 686
USAA Investment Management Company 160 104
USAA Transfer Agency Company 25 20
Accounts payable and accrued expenses 45 70
Dividends on capital shares 848 50
-----------------------
Total liabilities 18,770 930
-----------------------
Net assets applicable to capital shares outstanding $618,914 $ 401,306
=======================
REPRESENTED BY:
Paid-in capital $613,366 $ 401,306
Accumulated net realized loss on investments (2,552) -
Net unrealized appreciation of investments 8,100 -
-----------------------
Net assets applicable to capital shares outstanding $618,914 $ 401,306
=======================
Capital shares outstanding 58,601 401,306
=======================
Authorized shares of $.01 par value 140,000 2,435,000
=======================
Net asset value, redemption price, and offering price per share $ 10.56 $ 1.00
=======================
</TABLE>
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Six-month period ended September 30, 1999
(Unaudited)
<CAPTION>
USAA
USAA California
California Money Market
Bond Fund Fund
------------------------
<S> <C> <C>
Net investment income:
Interest income $ 17,968 $ 6,661
------------------------
Expenses:
Management fees 994 655
Transfer agent's fees 139 107
Custodian's fees 57 55
Postage 11 17
Shareholder reporting fees 4 7
Directors' fees 2 2
Registration fees 5 -
Professional fees 11 12
Other 6 3
------------------------
Total expenses 1,229 858
------------------------
Net investment income 16,739 5,803
------------------------
Net realized and unrealized loss on investments:
Net realized loss (2,431) -
Change in net unrealized appreciation/depreciation (39,967) -
------------------------
Net realized and unrealized loss (42,398) -
------------------------
Increase (decrease) in net assets resulting from operations $(25,659) $ 5,803
========================
</TABLE>
See accompanying notes to financial statements.
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended September 30, 1999, and year ended March 31, 1999
(Unaudited)
<CAPTION>
USAA USAA
California California
Bond Fund Money Market Fund
-------------------------------------------
9/30/99 3/31/99 9/30/99 3/31/99
-------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income $ 16,739 $ 30,424 $ 5,803 $ 11,846
Net realized gain (loss) on investments (2,431) 119 - -
Change in net unrealized appreciation/
depreciation of investments (39,967) 5,588 - -
-------------------------------------------
Increase (decrease) in net assets
resulting from operations (25,659) 36,131 5,803 11,846
-------------------------------------------
Distributions to shareholders from:
Net investment income (16,739) (30,424) (5,803) (11,846)
-------------------------------------------
From capital share transactions:
Proceeds from shares sold 55,838 152,433 183,324 482,344
Dividend reinvestments 11,599 21,003 5,460 11,109
Cost of shares redeemed (47,778) (71,237) (226,686) (485,999)
-------------------------------------------
Increase (decrease) in net assets
from capital share transactions 19,659 102,199 (37,902) 7,454
-------------------------------------------
Net increase (decrease) in net assets (22,739) 107,906 (37,902) 7,454
Net assets:
Beginning of period 641,653 533,747 439,208 431,754
-------------------------------------------
End of period $618,914 $641,653 $401,306 $439,208
===========================================
Change in shares outstanding:
Shares sold 5,076 13,515 183,324 482,344
Shares issued for dividends reinvested 1,068 1,859 5,460 11,109
Shares redeemed (4,370) (6,329) (226,686) (485,999)
-------------------------------------------
Increase (decrease)
in shares outstanding 1,774 9,045 (37,902) 7,454
===========================================
</TABLE>
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA Tax Exempt Fund, Inc. (the Company), registered under the Investment
Company Act of 1940, as amended, is a diversified, open-end management
investment company incorporated under the laws of Maryland consisting of ten
separate funds. The information presented in this semiannual report pertains
only to the USAA California Bond Fund and USAA California Money Market Fund (the
Funds). The Funds have a common objective of providing California investors with
a high level of current interest income that is exempt from federal and
California state income taxes. The USAA California Money Market Fund has a
further objective of preserving capital and maintaining liquidity.
A. Security valuation - Investments in the USAA California Bond Fund are valued
each business day by a pricing service (the Service) approved by the Company's
Board of Directors. The Service uses the mean between quoted bid and asked
prices or the last sale price to price securities when, in the Service's
judgement, these prices are readily available and are representative of the
securities' market values. For many securities, such prices are not readily
available. The Service generally prices these securities based on methods which
include consideration of yields or prices of municipal securities of comparable
quality, coupon, maturity, and type, indications as to values from dealers in
securities, and general market conditions. Securities which are not valued by
the Service, and all other assets, are valued in good faith at fair value using
methods determined by the Manager under the general supervision of the Board of
Directors. Securities purchased with maturities of 60 days or less and, pursuant
to Rule 2a-7 under the Investment Company Act of 1940, as amended, all
securities in the USAA California Money Market Fund, are stated at amortized
cost which approximates market value.
B. Federal taxes - Each Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income or excise tax provision is required.
C. Investments in securities - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gain or loss from sales
of investment securities is computed on the identified cost basis. Interest
income is recorded daily on the accrual basis. Premiums and original issue
discounts are amortized over the life of the respective securities. Market
discounts are not amortized. Any ordinary income related to market discounts is
recognized upon disposition of the securities. The Funds concentrate their
investments in California municipal securities and therefore may be exposed to
more credit risk than portfolios with a broader geographical diversification.
D. Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINES OF CREDIT
The Funds participate with other USAA funds in three joint short-term revolving
loan agreements totaling $850 million, two with USAA Capital Corporation
(CAPCO), an affiliate of the Manager ($250 million committed and $500 million
uncommitted), and one with Bank of America ($100 million committed). The purpose
of the agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely disposition of
securities. Subject to availability under both agreements with CAPCO, each Fund
may borrow from CAPCO an amount up to 5% of its total assets at CAPCO's
borrowing rate with no markup. Subject to availability under its agreement with
Bank of America, each Fund may borrow from Bank of America, at Bank of America's
borrowing rate plus a markup, an amount which, when added to outstanding
borrowings under the CAPCO agreements, does not exceed 15% of its total assets.
The Funds had no borrowings under any of these agreements during the six-month
period ended September 30, 1999.
(3) DISTRIBUTIONS
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security transactions
not offset by capital losses are made in the succeeding fiscal year or as
otherwise required to avoid the payment of federal taxes. At September 30, 1999,
the USAA California Bond Fund had capital loss carryovers for federal income tax
purposes of approximately $2.6 million which, if not offset by subsequent
capital gains, will expire in 2003. It is unlikely that the Company's Board of
Directors will authorize a distribution of capital gains realized in the future
until the capital loss carryovers have been utilized or expire.
(4) INVESTMENT TRANSACTIONS
Costs of purchases and proceeds from sales/maturities of securities for the
six-month period ended September 30, 1999, were as follows:
USAA California USAA California
Bond Fund Money Market Fund
($000) ($000)
------------------------------------
Purchases $166,643 $597,046
Sales/maturities $146,027 $595,308
For the USAA California Bond Fund, costs of purchases and proceeds from
sales/maturities excludes short-term securities.
Gross unrealized appreciation and depreciation of investments at September 30,
1999, was as follows:
Appreciation Depreciation Net
($000) ($000) ($000)
-------------------------------------------
USAA California Bond Fund $24,174 ($16,074) $8,100
(5) TRANSACTIONS WITH MANAGER
A. Management fees - USAA Investment Management Company (the Manager) carries
out each Fund's investment policies and manages each Fund's portfolio.
Management fees are computed as a percentage of aggregate average net assets
(ANA) of both Funds combined, which on an annual basis is equal to .50% of the
first $50 million, .40% of that portion over $50 million but not over $100
million, and .30% of that portion over $100 million. These fees are allocated on
a proportional basis to each Fund monthly based upon ANA.
B. Transfer agent's fees - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services, an affiliate of the Manager, provides transfer agent services
to the Funds based on an annual charge of $28.50 per shareholder account plus
out-of-pocket expenses.
C. Underwriting services - The Manager provides exclusive underwriting and
distribution of the Funds' shares on a continuing best-efforts basis. The
Manager receives no commissions or fees for this service.
(6) TRANSACTIONS WITH AFFILIATES
Certain directors and officers of the Funds are also directors, officers, and/or
employees of the Manager. None of the affiliated directors or Fund officers
received any compensation from the Funds.
(7) YEAR 2000
Like other mutual funds, the Funds could be adversely affected if the computer
systems used by the Manager and the Funds' other service providers are not able
to perform their intended functions effectively after 1999 because of the
inability of computer software to distinguish the year 2000 from the year 1900.
The Manager has taken steps to address this potential year 2000 problem with
respect to the computer systems that it uses and to obtain satisfactory
assurances that comparable steps are being taken by the Funds' other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact on the Funds from this
problem.
<TABLE>
(8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Six-Month
Period Ended
September 30, Year Ended March 31,
---------------------------------------------------
1999 1999 1998 1997 1996 1995
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 11.29 $ 11.17 $ 10.50 $ 10.43 $ 10.10 $ 10.03
Net investment income .29 .59 .60 .61 .60 .59
Net realized and
unrealized gain (loss) (.73) .12 .67 .07 .33 .07
Distributions from net
investment income (.29) (.59) (.60) (.61) (.60) (.59)
-----------------------------------------------------------------
Net asset value at
end of period $ 10.56 $ 11.29 $ 11.17 $ 10.50 $ 10.43 $ 10.10
=================================================================
Total return (%)* (3.95) 6.46 12.33 6.60 9.35 6.89
Net assets at end
of period (000) $618,914 $641,653 $533,747 $440,231 $409,180 $372,877
Ratio of expenses to
average net assets (%) .39(a) .39 .40 .41 .42 .44
Ratio of net investment
income to average
net assets (%) 5.29(a) 5.21 5.47 5.74 5.74 5.98
Portfolio turnover (%) 23.78 7.20 20.16 23.72 23.09 28.86
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income distributions during the period.
</TABLE>
<TABLE>
NOTES TO FINANCIAL STATEMENTS (Continued)
USAA CALIFORNIA MONEY MARKET FUND
September 30, 1999
(Unaudited)
(8) FINANCIAL HIGHLIGHTS (Continued)
Per share operating performance for a share outstanding throughout each period
is as follows:
<CAPTION>
Six-Month
Period Ended
September 30, Year Ended March 31,
-------------------------------------------------------
1999 1999 1998 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .01 .03 .03 .03 .04 .03
Distributions from net
investment income (.01) (.03) (.03) (.03) (.04) (.03)
--------------------------------------------------------------------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====================================================================
Total return (%)* 1.40 3.03 3.35 3.23 3.58 2.94
Net assets at end
of period (000) $401,306 $439,208 $431,754 $341,128 $296,349 $266,764
Ratio of expenses to
average net assets (%) .41(a) .42 .41 .45 .47 .47
Ratio of net investment
income to average
net assets (%) 2.78(a) 2.99 3.30 3.19 3.52 2.91
(a) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
* Assumes reinvestment of all dividend income distributions during the period.
</TABLE>
DIRECTORS
Robert G. Davis, Chairman of the Board
Michael J.C. Roth, President and Vice Chairman of the Board
John W. Saunders, Jr., Vice President
Barbara B. Dreeben
Howard L. Freeman, Jr.
Robert L. Mason
Richard A. Zucker
INVESTMENT ADVISER, UNDERWRITER AND DISTRIBUTOR
USAA Investment Management Company
9800 Fredericksburg Road
San Antonio, Texas 78288
TRANSFER AGENT
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT AUDITORS
KPMG LLP
112 East Pecan, Suite 2400
San Antonio, Texas 78205
Telephone Assistance Hours
Call toll free - Central Time
Monday - Friday 7:00 a.m. to 9:00 p.m.
Saturdays 8:30 a.m. to 5:00 p.m.
Sundays 11:30 a.m. to 8:00 p.m.
Internet Access
www.usaa.com
For Additional Information on Mutual Funds
1-800-531-8181, (in San Antonio) 456-7211
For account servicing, exchanges, or redemptions
1-800-531-8448, (in San Antonio) 456-7202
Recorded Mutual Fund Price Quotes
24-Hour Service (from any phone)
1-800-531-8066, (in San Antonio) 498-8066
Mutual Fund USAA TouchLine(Registered Trademark)
(from Touchtone phones only)
For account balance, last transaction or fund prices
1-800-531-8777, (in San Antonio) 498-8777
